- Historic Sites
February/march 1993 | Volume 44, Issue 1
Customs duties on opium produced not only revenues but smuggling. The same thing would surely happen today.
One of the selling points of controlled legalization was also one of the decisive arguments for the repeal of Prohibition: taxation. Instead of spending billions to suppress the illicit traffic, the government would reap billions by imposing duties on legitimate imports and taxes on domestically manufactured drugs. Not only could these revenues be earmarked for drug treatment and education programs, but they would also increase the prices paid by the consumer, thus discouraging consumption, especially among adolescents.
The United States government has had extensive historical experience with the taxation of legal narcotics. In the nineteenth and early twentieth centuries, opium was imported and subject to customs duties. The imports were assigned to one of three categories. The first was crude opium, used mainly for medicinal purposes and for the domestic manufacture of morphine. Foreign-manufactured morphine, codeine, and heroin made up the second class of imports, while the third was smoking opium, most of it prepared in Hong Kong and shipped to San Francisco.
The imposts on these imported drugs fluctuated over the years, but they were generally quite stiff. From 1866 to 1914 the average ad valorem duty on crude opium was 33 percent; for morphine or its salts, 48 percent. From 1866 to 1908 the average duty on smoking opium was an extraordinarily high 97 percent. This last was in the nature of a sin tax; congressmen identified opium smoking with Chinese coolies, gamblers, pimps, and prostitutes and wished to discourage its importation and use.
These customs duties produced revenue; they also produced widespread smuggling, much of it organized by violent criminal societies like the Chinese tongs. The smugglers were as ingenious as their latter-day Mafia counterparts. They hid their shipments in everything from hollowed-out lumber to snake cages. Avoiding the customs collectors, they saved as much as three dollars a pound on crude opium, three dollars an ounce on morphine, and twelve dollars a pound on smoking opium. Twelve dollars seems a trifling sum by modern standards, hardly worth the risk of arrest, but in the nineteenth century it was more than most workers earned in a week. Someone who smuggled in fifty pounds of smoking opium in 1895 had gained the equivalent of a year’s wages. One knowledgeable authority estimated that when the duty on smoking opium was near its peak, the amount smuggled into the United States was nearly twice that legally imported and taxed. Something similar happened with eighteenth-century tobacco imports to the British Isles. More than a third of the tobacco consumed in England and Scotland circa 1750 had been clandestinely imported in order to avoid a duty of more than five pence per pound. The principle is the same for domestically produced drugs: If taxes are sufficiently onerous, an illegal supply system will spring up. Moonshining existed before and after, as well as during, Prohibition.
The obvious solution is to set taxes at a sufficiently low level to discourage smuggling and illegal manufacturing. But again there is a dilemma. The most important illicit drugs are processed agricultural products that can be grown in several parts of the world by peasant labor. They are not, in other words, intrinsically expensive. Unless they are heavily taxed, legal consumers will be able to acquire them at little cost, less than ten dollars for a gram of cocaine. If drugs are that cheap, to say nothing of being 100 percent pure, the likelihood of a postlegalization epidemic of addiction will be substantially increased. But if taxes are given a stiff boost to enhance revenues and limit consumption, black marketeers will reenter the picture in numbers proportionate to the severity of the tax.
Tax revenues, like drugs themselves, can be addictive. In the twelve years after the repeal of Prohibition, federal liquor tax revenues ballooned from 259 million to 2.3 billion dollars. The government’s dependence on this money was one important reason anti-liquor forces made so little progress in their attempts to restrict alcohol consumption during World War II. Controlled drug legalization would also bring about a windfall in tax dollars, which in an era of chronic deficits would surely be welcomed and quickly spent. Should addiction rates become too high, a conflict between public health and revenue concerns would inevitably ensue.
When both proponents and opponents of controlled legalization talk about drug taxes, they generally assume a single level of taxation. The assumption is wrong. The nature of the federal system permits state and local governments to levy their own taxes on drugs in addition to the uniform federal customs and excise taxes. This means that total drug taxes, and hence the prices paid by consumers, will vary from place to place. Variation invites interstate smuggling, and if the variation is large enough, the smuggling can be extensive and involve organized crime.